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The 10% price cut gamble in supermarket deal

10%. Remember that figure every time you hear the merger between Sainsbury's and Asda being discussed during the next 18 months and - should it be waved through by the competition watchdogs - after it has been completed.
Chief executives, like politicians, hate setting public targets to which they can be held. It makes them a hostage to fortune.Yet that is precisely what Mike Coupe, the Sainsbury's chief executive, has done today. He has pledged that, should this blockbuster deal go through, he will cut the price of everyday household items by 10%.:: Sainsbury's and Asda defend €13bn mergerThat is a dramatic promise and one to which he can expect to be held.Mr Coupe may have felt the need to make such an eye-catching promise, though, since the regulatory hurdles facing this deal look daunting.
The 10% price cut gamble in supermarket deal

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Mike Coupe (CEO, Sainsbury's), Judith McKenna (President and CEO of Walmart International) and Roger Burnley (President and CEO of Asda )
The combined Sainsbury's and Asda would be a retailing Goliath with annual sales of €51bn from more than 2,800 stores and employing more than 330,000 people.Based on the most recent Kantar Worldpanel industry data, it would have 31.4% of the UK grocery market, putting it ahead of the current market leader Tesco on 27.6%.In other words, four players would become three, with two of those players accounting for more than half the grocery market between them.That would be clear grounds, some will argue, for this deal to be blocked.
The 10% price cut gamble in supermarket deal

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Will Sainsbury's-Asda deal lower prices?
Mr Coupe, though, says there are several "compelling" reasons why the Competition & Markets Authority (CMA) should allow the deal to go through.:: Why Walmart is willing to check out of AsdaThe first is that promise to cut the price of everyday items by 10% - the clearest and most tangible evidence he can offer as to why this deal would be pro-consumer and not anti-consumer.Mr Coupe also argues the market share statistics are misleading. Yes, he admits, the combined Asda and Sainsbury's would have more than 30% share of the grocery market.That measure, he says, is too narrow a definition because both Sainsbury's and Asda have substantial non-food operations and compete with numerous non-grocers, including the likes of Boots and Marks & Spencer.
The 10% price cut gamble in supermarket deal

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Take into account the wider market, he says, and the combined Sainsbury's and Asda looks significantly less dominant.
And that is even before the CMA has a chance to assess the massive disruption in the grocery market caused by the rise of Aldi and Lidl, the German hard discounters, or the relentless rise of online at the expense of traditional bricks and mortar retailers.A third card Mr Coupe can play is that the CMA recently waved through, to the astonishment of many in the City, the €3.6bn takeover of cash-and-carry operator Booker by Tesco.Many of the arguments made by Tesco as to why that deal should be allowed to go through will now be deployed by Sainsbury's and Asda - even though the two deals were not strictly alike because the former was a 'vertical' takeover of a wholesaler by a retailer while the latter is a 'horizontal' combination between two competitors.
The 10% price cut gamble in supermarket deal

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Could Morrisons win in Sainsbury's-Asda deal?
Strikingly, Mr Coupe also points out the CMA recently permitted the merger of two of the big four high street bookmakers - Ladbrokes and Coral - in another move that effectively distilled the market from four major players to three.On that occasion, the CMA required Ladbrokes and Coral to offload some of their stores, a demand that the CMA will almost certainly make of Sainsbury's and Asda.If there will be no job losses in stores as a result of this deal, something on which Mr Coupe has been emphatic, unions will naturally be concerned about potential job cuts in warehousing and distribution.They should really be flagging concerns about job cuts at suppliers.Perhaps the most striking statistic wheeled out today by Mr Coupe was that, of all the goods sold by Sainsbury's and Asda, 85% of them are sourced from the top 100 suppliers to the industry. Yes, he will be beating up suppliers on price, he admitted. But those suppliers will not be small businesses or farmers - but giant multinationals like Procter & Gamble, Kraft Heinz and Unilever.They will be the ones expected to bear the brunt of the €350m that Mr Coupe expects to save each year from combining the buying power of Sainsbury's and Asda. The real figure is likely to be higher still.That €350m figure is reached by simply comparing the list of goods sold by the two retailers and, where there are identical products, applying the cheaper price across the whole business. In reality, the savings are likely to be far higher, which is why Mr Coupe feels confident in making that remarkable 10% pledge.The promise is not without risks in other regards, though. Asda is known for its everyday low prices while Sainsbury's is known for the strength of its fresh food offer and the high quality of its food.The two have very distinct positions in the market. However, once the deal has gone through, there should be no reason why, say, a 2 litre bottle of Coca-Cola should cost any more in Sainsbury's than it does in Asda.After all, the same products in both stores will have been bought by the same buying team. Aligning the prices of items sold by the two businesses should, in theory, make Sainsbury's considerably more competitive. But it does risk eroding the cachet that Sainsbury's enjoys among a lot of its wealthier customers in London and the South East of England.
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When Sainsbury's bought Argos two years ago, Mr Coupe was at pains to insist that the pair had more customers in common than was assumed by City investors, who he suspected had a rather snooty view of the catalogue retailer.But it was striking today that he would not be drawn on the question of whether, in the future, Asda customers might be able to pop a few items from Sainsbury's 'Taste The Difference' range into their basket.
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